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Here is everything you need to know about IFRS.
IFRS
IFRS stands for- The International Financial Reporting Standards.
It is the accounting standard used in more than 100 countries.
In this article we will discuss-
- What is IFRS
- It's objectives
- Principles
What is IFRS
IFRS is a set of accounting standards developed by the ISAB, the International accounting standard-setting body.
The standards stated by IASB are based on sound and clearly stated principles. Therefore, IFRS are called as principles-based accounting standards.
In the era of globalization and advanced technology, businesses spread to the worldwide.
If the birth of the company is in India, the branches of that company spread to the other countries and vice versa.
The company has an obligation to prepare books of accounts, so logically if a company has five branches in five different countries, they have to prepare different books of accounts according to their norms.
For example, an Indian company has three branches in three different countries –America, India, and Australia. So, they have to make different rules of books which is not understandable to each other, time taking process and many more disadvantages.
The solution of these problems was neglected by International Accounting Standard Board (IASB).
This board launched IFRS(International Financial Reporting Standards) which means that the rules and regulations of all the countries remain the same.
Objectives of ISAB
Introduction of Accounting Principles
“Principles of accounting refered as general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”. Accounting principles are the rules and regulations which is adopted by the accountants while doing accounting treatments.
- To develop public interest, understandable and enforceable global accounting standards that require high quality of transparent and comparable information in financial reports to help participants in the various capital market of the world and take a relevant economic decision.
- To promote use and continuous application of those standards.
Introduction of Accounting Principles
“Principles of accounting refered as general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”. Accounting principles are the rules and regulations which is adopted by the accountants while doing accounting treatments.
Principles of Accounting
1. Going concerned- The concept of this concept is the business should be run for a foreseeable period and there will be no intention to close the business.
1. Going concerned- The concept of this concept is the business should be run for a foreseeable period and there will be no intention to close the business.
For example, if the owner of the business will expire or the expenses and losses are high then the business will not be dissolved.
2. Consistency period- According to this concept once the owner chooses the method to run the business, then he can not change his way. That method should be applied year after year.
2. Consistency period- According to this concept once the owner chooses the method to run the business, then he can not change his way. That method should be applied year after year.
For example, depreciation has two methods to apply- Written Down Value and Straight Line Method, if the owner chooses Written Down Value then he cannot change his method.
3. Accrual concept- This concept says that when the transaction is entered into, then record in the books of accounts not when settlement takes place.
3. Accrual concept- This concept says that when the transaction is entered into, then record in the books of accounts not when settlement takes place.
For example- ABC ltd. Sales machinery to XYZ Ltd. on 27 February but the payment is received on 27 April. In this case, the date when entry will pass in books of accounts is 27 February.
4. Business entity concept- According to this principle business and owner are separate things.
If the owner commenced capital to start the business then the liability arises on the business to pay off that money to an owner.
5. Money measurement principle- This principle allows those transactions to record in books of accounts which can be measure in money terms.
5. Money measurement principle- This principle allows those transactions to record in books of accounts which can be measure in money terms.
For example, ram purchase a bike of rs 100000, this entry will pass in books and if ram promises to buy a bike, this will not.
6. Accounting period principle- As the business run ongoing concerning the concept, so it is difficult to measure the performance at the end of life.
6. Accounting period principle- As the business run ongoing concerning the concept, so it is difficult to measure the performance at the end of life.
So, the life of an enterprise is broken into equal time intervals which are called accounting years.
7. Full disclosure- All complete and understandable information like income statements and balance sheets should be disclosed to the government, investors, employees, etc.
8. Materiality concept- This principle permits other concepts to be ignored if the effect is not considered material.
7. Full disclosure- All complete and understandable information like income statements and balance sheets should be disclosed to the government, investors, employees, etc.
8. Materiality concept- This principle permits other concepts to be ignored if the effect is not considered material.
All the items having a significant economic effect on the business of the enterprise should be disclosed in the financial statements and any insignificant item which only increases accountant work but will not be relevant to users, should not be disclosed in the financial statements.
9. Prudence or conservatism principle- According to this principle “Do not anticipate a profit, but provide for all possible losses”.
9. Prudence or conservatism principle- According to this principle “Do not anticipate a profit, but provide for all possible losses”.
In other words, it takes into consideration all prospective losses but not the prospective profit.
10. Historical cost- Let's take an example to understand this concept if the company purchases a machine suppose rs 10,00,000 but the balance sheet is prepared at the end of the period, so at that time the price of the machine falls due to depreciation but the price of machine recorded in books is rs 10,00,000.
11. Matching concept- As per this concept expenses of the business should be matched with the revenue of the business.
10. Historical cost- Let's take an example to understand this concept if the company purchases a machine suppose rs 10,00,000 but the balance sheet is prepared at the end of the period, so at that time the price of the machine falls due to depreciation but the price of machine recorded in books is rs 10,00,000.
11. Matching concept- As per this concept expenses of the business should be matched with the revenue of the business.
Mainly this concept is used while preparing financial statements.
12. Dual aspect- this is a very simple concept. The concept is every transaction has double entry i.e debit and credit.
12. Dual aspect- this is a very simple concept. The concept is every transaction has double entry i.e debit and credit.
IFRS has lot for us. Knowing it's definition, objectives and principles makes accounting easy for us and helps us to grow in not only a subject but a wide area opens up.
Written By: Lakshya Thakur
Edited By: Komal Jha
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